Regulators Struggle With a Marketplace Created by Enron

For years, the Enron Corporation used its political muscle to build the markets in which it thrived, pushing relentlessly on Capitol Hill and in bureaucratic backwaters to deregulate the nation's natural gas and electricity businesses.

Its achievement, as one Enron executive said today, in creating a ''regulatory black hole'' fit nicely with what he called the company's ''core management philosophy, which was to be the first mover into a market and to make money in the initial chaos and lack of transparency.''

Now, Wall Street's dissatisfaction with Enron's secretive ways has delivered the company into the arms of its much smaller Houston rival, Dynegy Inc., in a deal worth about $9 billion in stock and the assumption of $13 billion in debt. The combination of the two companies, energy experts and lawmakers said today, poses a novel set of challenges for regulators still struggling to grasp the complexities of the marketplace that Enron invented.

''We're in a supersonic-speed era of electronic trading with a horse-and-buggy-era regulatory system to protect consumers,'' said Representative Edward J. Markey, a Massachusetts Democrat who has devised legislation to close the regulatory gap.

Dynegy's acquisition of Enron is expected to be reviewed by numerous state and federal agencies, led by the Justice Department, the Federal Trade Commission and the Federal Energy Regulatory Commission.

Analysts said today that sharp scrutiny would be given to the combined companies' holdings in California, where Dynegy owns generating plants and Enron controls a large part of the market for trading natural gas -- the fuel for a big share of the state's electric power plants.

''Dynegy would now have a greater ability to take the dominant position in gas and raise the price of electricity,'' said Frank Wolak, a professor of economics at Stanford University.

Mr. Wolak, a consultant to the Justice Department on a 1999 antitrust case that led to limits on another merger of electricity and natural gas companies in Southern California, said he was skeptical that regulators were up to the task of reviewing today's deal.

The transaction ''is something the Department of Justice needs to look at, and they are going to have a hard time looking at,'' Mr. Wolak said. ''And it's beyond the ability of the F.E.R.C. to look at.''

Pat Wood -- named chairman of the federal energy commission earlier this year with the backing of Kenneth L. Lay, the chairman of Enron -- acknowledged in an interview today that the agency had ''a long way to go'' in matching the sophistication of the companies it regulates.

But he said that the commission had made great strides in grappling with the new risk management techniques pioneered by Enron, Dynegy and other energy companies. It is hiring more experts, he said, adopting more restrictive rules on how much ''market power'' one party can control and requiring more disclosure of certain energy transactions.

In an interview this evening, Charles L. Watson, the chairman of Dynegy, said he did not believe that regulators reviewing the deal with Enron would require the sale of any assets. ''We haven't really identified any pitfalls that require any sort of asset divestiture,'' he said. ''There's not really any overlap.''

A senior executive at one of Enron's largest energy-trading rivals disagreed. ''I don't think this deal gets through unscathed,'' he said today. ''I'm sure the Justice Department and the F.T.C. will look closely at the pretty substantial concentration of market power these companies will have in the energy-trading area.''

Enron is mainly a trader of natural gas and electricity -- indeed, the biggest player in both those markets -- and it also owns a network of gas pipelines. Dynegy processes and sells natural gas and generates and sells electricity. Each company owns a local electric utility, too: Dynegy owns Illinois Power in Decatur, Ill., while Enron owns Portland General Electric in Portland, Ore., but last month announced plans to sell it to another Oregon utility.

For a decade, as it transformed itself from a gas pipeline operator into the nation's biggest energy trader, Enron enjoyed unalloyed lobbying success in Washington and the enthusiastic backing of Wall Street.

In the early months of the Bush administration, Mr. Lay -- whose company was one of the biggest financial backers of George W. Bush's presidential campaign -- played a prominent, and some said unusual, role in helping the White House pick nominees to the federal energy commission. Enron executives met with Vice President Dick Cheney, whose energy task force backed many of the deregulatory initiatives pushed by Mr. Lay.

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Now, ''the company has become a pariah,'' an Enron executive said today. ''The Bush administration doesn't want to have anything to do with us.''

The problems began with the energy crisis in California, where Enron's outspoken defense of deregulation, even more than its electricity trading activities, made the company a favorite whipping boy of politicians and consumer advocates. In the financial markets, meanwhile, Enron's confusing disclosures, tolerated when its stock was soaring, drew disdain as the calming of the energy storms in California and other parts of the country beat the shares down, starting last spring.

''Enron fell victim to their own inconsistencies on transparency,'' Mr. Wolak said. As California officials sought to understand why energy prices had soared out of control, he said, Enron's ''view was that we want everybody's data, but if you want ours, get a subpoena.''

Energy executives and regulators said that sort of arrogance had long marked Enron's attitude about government oversight.

Electricity sales had for decades been the job of local utility companies, operating as monopolies and selling power at regulated rates within their service areas. A few entrepreneurs, led by Mr. Lay, conceived a different model in which power could be sold by generators or middlemen to big corporate users or utilities in faraway regions, at whatever price the market would bear.

In the early 1990's, Congress -- under heavy lobbying by Enron -- passed legislation that began to open up electricity sales to marketers. Before long, Enron became one of the first companies to receive government approval to sell electricity at market rates. The market for interstate sales of natural gas had been freed up a few years earlier, and critics complained that traders like Enron were gleaning their profits by stoking volatility in gas prices.

In the mid-1990's, independent gas producers backed legislation in Congress to allow the creation of a co-operative marketing organization, which, they hoped, would have helped stabilize prices.

Raymond Plank, the chairman of the Apache Corporation, a gas producer based in Houston, said that the big gas marketing and trading companies, including Enron, successfully lobbied to kill the plan, leaving prices as volatile as ever.

''It was a great concept,'' Mr. Plank said. ''We could have headed off the problems we have today.''

Enron's final lobbying success came last year. With a strong push from the company's lobbyists, Congress passed futures trading legislation that exempted Internet energy trading platforms like EnronOnline, the industry leader, from oversight by the Commodity Futures Trading Commission. Enron takes the other side of trades on its exchange. In traditional markets like the New York Mercantile Exchange, which remain subject to oversight, the exchange acts as a middleman between buyers and sellers.

Under Mr. Watson, Dynegy has been less of a pathbreaker than Enron, and though California politicians denounced it, too, as a profiteer during the energy crisis, most analysts say it has been less aggressive than Enron in both its business practices and its lobbying.

Indeed, the rival energy-trading executive today predicted ''a huge culture clash'' as the Houston neighbors merge. ''Blood will flow in Houston over the integration of the trading operation,'' he said.

But regulators may find Dynegy easier to deal with.

Earlier this year, the federal energy commission asked for comments on whether it should tighten scrutiny of dealings between natural gas pipelines and energy-trading shops owned by the same company.

Enron wondered what all the bother was. ''Would stricter rules prevent real affiliate abuse that current rules do not,'' it wrote in a regulatory filing, ''or would they instead merely restrict the activities of some of the more successful participants in the marketplace?''

Dynegy, by contrast, painted a grim picture and invited regulators to crack down. ''Abuses abound,'' it said, ''because of financial windfalls, difficulty of detection, lengthy investigations and increased complexity of the market.''

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A version of this article appears in print on November 10, 2001, on Page C00001 of the National edition with the headline: Regulators Struggle With a Marketplace Created by Enron. Order Reprints|Today's Paper|Subscribe